Outlook for Mobile Home Parks:2007 and Beyond

Question: How Will The Housing Downturn Affect Mobile Home Parks (MHPs)?

In my view the worst that can happen for MHPs has already occurred. Low rates and easy money for traditional housing; an industry-wide meltdown of chattel lenders for single and multi-section homes without land; and a resulting decrease of production levels to fifty year lows (<100,000 per year), with a decline in single-wides to 10% of total units produced. To survive, MH producers and retailers were forced to focus on the land/home finance model, using multi-section homes, and completely abandon sales of single-wides in land-lease parks.

And all of the above happened in the midst of the greatest housing boom ever. Realize that this is not due to a lack of demand for single-wides, or parks, but a result of the lender backlash due to the industry's demonstrated lack of integrity in single wide finance. As a result, mobile home parks have performed below trend for the last few years. But I believe the current housing problems will change that in the months to come. Just as in past housing downturns, the tightening credit in the mortgage market will provide an unfilled demand for affordable housing.

Rentals Are Not The Answer

Just as apartment fundamentals are counter-cyclical to housing sales, mobile home parks traditionally prosper when the housing markets get tight. But there are right ways to fill the demand, and wrong ways. Some MHP owners have turned to rental mobile homes to bolster cash flow, and most have learned the hard lesson that the revenue is an illusion that creates more problems than it solves. If you add up the expense of maintenance, taxes, transient tenants and collection losses, a rental home is a net drain on cash flow.

But more importantly, the presence of rental homes greatly reduces the value of the park because of the high expense and unstable income stream. The value of a park increases with owner-occupants because the cost of moving is so high. There is a great opportunity for MHP owners to build value by finding parks with this critical mistake, remedy it, and create a total housing package to serve the ever-growing demand for affordable housing.

Background

Two points of background are necessary to understand the situation.

First, existing MHPs have what I call a government protected franchise. It stems from the near impossibility of getting zoning approvals to build new parks in most jurisdictions (yes, there are exceptions, but few). That means the supply of land-lease spaces is constricted, which is known as a high barrier to entry for competition. That's a good thing. Second, as a housing option MHs have an inherent advantage over apartments… to own rather than rent, for about the same monthly cost. Regardless of personal opinions about quality, realize that many people value the privacy of not having conjoined walls, a parking spot at the front door, and the freedom to accessorize their home as they please. Mobile homes are a valid housing alternative, and can be very profitable if packaged correctly.

With That In Mind, Consider The Following:

The current increase in foreclosures-both from sub-prime borrowers as well as the natural cycle of a slowing economy-is in essence bringing the MH customer home again, pun intended. The sub-prime borrowers were the natural constituents of the MH market before the sub-prime lending frenzy stole them away, albeit aided by the dearth of finance for MHs. This creates a rising number of people in need of housing, with credit problems for sure, but with little desire to go back to a rental apartment. These buyers are salvageable as MH buyers, and MHP tenants. If handled correctly, this is a huge opportunity to make money in MHPs.

Housing As A Package

The field is clear for MHP owners to offer their product as a package solution that makes the MH buying process simple, affordable, quick and easy. Notice I did not say cheap. Affordable yes, but to think MHs compete on price alone is a mistake. Like frozen food the value is in the preparation, packaging and convenience. By offering the product with affordable terms the MHP owner can create a win-win for home buyers and the value of the park.

The opportunity lies in solving the supply, location, supply and finance issues for the home buyer and delivering a bundled package of product and services. Note that last word. Service is the newest old thing to re-emerge as a large determinant in buying decisions. We're all a little tired of the self-serve world, and a business that pays real attention to service has an unbeatable marketing edge.

How Do You Deliver That Product?

If you have (or can buy) a park with empty spaces, or lots of rental homes that can be eliminated or sold, that's the most important part of the puzzle. You have a product that is in limited supply, and serves a basic need. Realize that the value of your park increases with every space filled with an owner-occupant, and continues to increase as space rents increase. Parks aren't as sensitive to losing tenants due to rent increases because of the cost of moving a home, and the limited places to locate them. Every $10,000 increase in net operating income translates to an increase of $125,000 in property value (at an 8% cap rate).

The next step is to make homes available, on your terms, in your park. The supply side takes some hustle. New single-wides are hard to find, and the drop in production is not going to turn around overnight. Repossessions, dealer trade-ins and private sales are the top sources of units for park owners. Buying used homes, spending some money to move and refurbish them and getting them sold to an owner-occupant is well worth the cost, even if you don't make any money on the sale, because of the increase in property value for the park, and the way you sell them.

Regular readers of REIC are certainly no strangers to the finance side. Buying, selling and financing mobile homes on notes is a profitable business, and the perfect solution for MHP owners. The units serve the market for shelter at an affordable price, fill spaces with owner-occupied homes; and the notes create an additional income stream, highly marketable and portable.

The final piece, service, offers perhaps the most potential for creativity and profit. A MHP has a captive audience, and other businesses can profit just from having sponsored access to the residents. Bundle these benefits into the total product for greater appeal, higher value perception, and the pure novelty of making an old thing new again.

Think of the many inexpensive services hotels offer their guests as a way to add value without adding cost, like free internet access, restaurant coupons, and babysitting services. All these services are built into the hotel's room rate. A park can do the same thing by bundling local services into a resident benefit package. Bundled products can include local grocery store coupons, delivery services from local businesses, area merchant discounts, buying clubs, etc. Services such as free wireless internet, in-park storage, and annual maintenance contracts can be bundled into different levels of tenancy. Instead of just renting a space for a flat fee, super-size the deal with an add-on fee for extended service.

Trends start at the margins, and this may be the edge of the wave. Warren Buffet did not buy Clayton for fun. He saw his favorite play-a best-of-class player available at a discount price in a troubled industry. Their business model is built on having presence in each stage of the supply chain, which is another way of saying bundled services.

Learn Your Market

As always, local market conditions must be in place to support a park project, such as positive demographic trends of population and employment growth. Then create the housing product to serve the market. The value proposition for buyers will capture higher market share, improve MHP fundamentals, and create long-term upside for investors. This is the most compelling opportunity I've seen for mobile home parks in years, and now is the time to capture it.